≡ Menu

Advertisement


Explore Ford Motor Liquidity With Only 3 Ratios

Ford GT at the Regent Street Motor Show London 2018. Flickr Image.

Ford Motor Company (NYSE:F) is a leading automaker that specializes in the design and manufacturing of cars, trucks and SUVs.

Ford has thousands if not hundreds of offices and factories all around the world and employs more than 186,000 people globally.

For this reason, Ford Motor Company has a lot of expenses and is running a capital-intensive business that requires huge working capital to cover these expenses.

That said, Ford’s liquidity is of the utmost importance to the company due mainly to the capital-intensive nature of the business.

In this article, we will analyze Ford’s short-term liquidity from the perspective of 3 ratios, and they are:

1. Current Ratio
2. Working Capital
3. Quick Ratio (Acid Test Ratio)

Let’s check them out!

Ford Motor’s Current Ratio

Ford Motor current ratio

Ford Motor current ratio

* Curren ratio comes from the author’s own calculation and consists of total current assets divided by total current liabilities.
* Both current assets and current liabilities are GAAP measures and were extracted directly from Ford’s annual and quarterly statements.

The current ratio is one of the metrics that measure a company’s short-term liquidity.

The ratio takes the total current assets and divides them by the total current liabilities as shown in the following equation.

Current ratio = Current Assets / Current Liabilities

The current ratio equation shows that a ratio above 1.0 indicates adequate short-term assets coverage over the total current liabilities.

On the other hand, a ratio that is below 1.0 indicates insufficient assets coverage for the entire current liabilities within the next 12 months.

In this case, the company may have liquidity issues and has a greater risk of going out of business if the ratio continues to stay below the 1.0 levels for a prolonged period.

All told, Ford Motor seems to have no liquidity issues in the past as seen from the current ratios that had been above 1.0 between 2017 and 2020 in the chart above.

More importantly, Ford’s current ratio of 1.2 in the 4th quarter of 2020 suggests that the company should have enough liquid assets to pay for the total short-term liabilities that come due for the rest of 2021.

You may notice that Ford’s current ratio shot up considerably to 1.25 starting in 1Q 2020 and continued to go higher in 2Q 2020 which reached more than 1.30.

In particular, Ford had shored up its liquidity in 2020 in response to the COVID-19 outbreak that may have disrupted the company’s supply chain and negatively impacted the automotive business.

All in all, the latest current ratio of 1.20 shows that Ford’s total current assets would be sufficient for the coming liabilities that come due in a year or less.

Ford Motor’s Working Capital

Ford Motor working capital

Ford Motor working capital

* Working capital comes from the author’s own calculation and consists of total current assets minus total current liabilities.
* Both current assets and current liabilities are GAAP measures and were extracted directly from Ford’s annual and quarterly statements.

The working capital indicates the excess liquid assets that a company has after accounting for all current liabilities that come due in the next 12 months.

In Ford Motor’s case, the company has over $15 billion of working capital in each quarter between 2017 and 2020.

That was a huge sum of working capital that Ford had in the balance sheets as shown in the chart above.

Keep in mind that the working capital was liquid assets that could be in the form of cash, securities, inventories, receivable or any other short-term assets that Ford carried in its balance sheets.

More importantly, Ford carried almost $20 billion in working capital in 2020 4Q which Ford could deploy for any corporate purposes going forward.

In line with the current ratio that was above 1.0 as of Q4 2020, Ford should have no liquidity issues going forward considering that the company was carrying nearly $20 billion in working capital in the same quarter.

Ford Motor’s Quick Ratio

Ford Motor quick ratio

Ford Motor quick ratio

* Quick ratio comes from the author’s own calculation and consists of adjusted current assets minus total current liabilities.
* The adjusted current assets are non-GAAP measures and come from the author’s own calculations.

The quick ratio comes from an adjusted current ratio that is more refined and stringent compared to a non-adjusted current ratio.

In this case, the current assets are adjusted to strip off the semi-liquid assets, including the inventories and prepaid expenses.

What is left off in the current assets are assets that are near cash forms such as cash and cash equivalents, marketable securities and receivables.

Here is the equation that shows the quick ratio:

Quick Ratio = Adjusted Current Assets / Total Current Liabilities

Similar to the current ratio, a quick ratio above 1.0 indicates sufficient liquidity whereas a ratio below 1.0 shows insufficient liquid assets.

All told, Ford’s quick ratio as seen in the chart above had been above 1.0 for the period from 2017 to 2020.

In particular, Ford’s quick ratio increased substantially in 2Q 2020 to nearly 1.20, suggesting a deliberate move by the company to shore up its liquid assets in response to the COVID-19 pandemic.

As of 2020 4Q, the quick ratio of 1.05 indicates that Ford’s total liquid assets alone were more than sufficient to pay for the coming total current liabilities.

In short, Ford should not have any short-term liquidity problems for the rest of 2021 considering the company’s excess reserves of liquid assets in cash, marketable securities and receivables.

Conclusion

Ford Motor Company (NYSE:F) is an auto manufacturer that operates a capital-intensive automotive business.

Therefore, liquidity is important to the company.

From the current ratio of 1.2 as of 2020 Q4, it indicates that Ford should have enough liquidity in the next 12 months.

In terms of working capital, Ford has nearly $20 billion in liquid assets as of 2020 4Q that ranged from cash, inventories to receivables.

This figure suggests Ford’s adequate liquid assets that could cover the company’s short-term liabilities that come due within the next 12 months.

The quick ratio is another liquidity ratio that measures Ford’s ability to cover its coming liabilities.

However, the quick ratio is more stringent compared to the current ratio as it excludes certain semi-liquid assets such as inventories and prepaid expenses.

That said, Ford has a quick ratio of 1.05 as of 2020 Q4 and this suggests that the company’s highly liquid assets alone such as cash and marketable securities will be enough to pay for the entire total current liabilities that come due in the next 12 months.

References:

1. Financial data in this article was obtained and referenced from Ford’s financial statements available in Ford’s Earnings Releases.

2. Ratios came from the author’s own calculation.

2. Featured images in this article are used under creative commons licenses and sourced from the following websites: mangopulp2008 and Thomas Hawk.

Top articles that you might be interested:

Disclosure

Readers, investors, analysts, bloggers, visitors, researchers, writers, or academicians are highly encouraged to use, copy, quote, distribute, duplicate, modify, edit, upload, download, share and link any materials on this webpage such as the charts, snapshots, texts, paragraphs, etc. You can credit back to this page by a link or a mention of the website. Thanks for sharing!

{ 0 comments… add one }

Leave a Comment


X

Forgot Password?

Join Us